8.1.3

Inequality 2

Test yourself

Benefits and Costs of an Unequal Income Distribution

There are costs and benefits to unequal income distribution:

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Benefits of unequal income distribution

  • There are several benefits of unequal distributions:
    • Trickle down economics says that the poor may benefit from the success of the rich.
    • Unequal distributions can motivate some to work hard and can encourage entrepreneurship.
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Costs of unequal income distribution

  • There are costs to unequal distributions:
    • They will increase levels of absolute and relative poverty.
    • If poverty is high, people may not be able to afford the basic needs, leading to increased levels of crime.
    • If some people have a very high income, depending on the marginal propensity to import, this could lead to a worsening of the balance of trade. If income rises, people will import more.

Inequality Between Nations

As well as inequality in income within a nation, different nations have different average incomes (GDP per capita).

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Globalisation and deindustrialisation

  • The outsourcing of the manufacturing sector to developing nations created inequality in developed nations as the demand for manual and factory workers' skills fell drastically in the late 1900s.
  • However, GDP per capita growth in nations like China has benefited hugely from this change.
  • Although inequality in the USA has risen in recent years, in the last three decades, inequality between nations in the world has fallen.
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Job creation or destruction

  • Joseph Stiglitz (2018) argued that although many Western jobs were relocated to developing nations, jobs in developing nations were still destroyed faster than they were created.
  • Although people moved out of farming to work in higher 'value-add' industries like manufacturing, more people lost jobs than gained them.
  • The creation of jobs in the poorest developing countries may reduce the amount of people living in absolute poverty.
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Capitalism

  • Capitalism relies on firms, individual incentives and the price mechanism to allocate resources.
  • Although this has led to economic growth, many people believe that government policies to manage inequality between nations and within nations is needed.
  • The UK allocates 0.7% of Gross National Income towards foreign aid.

Jump to other topics

1Introduction to Markets

2Market Failure

3The UK Macroeconomy

4The UK Economy - Policies

5Business Behaviour

6Market Structures

7A Global Perspective

8Finance & Inequality

9Examples of Global Policy

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